More College Grads Equals Faster Economic Growth

Feb. 13 (Bloomberg) -- As the U.S. population ages, and
with the effects of the financial crisis promising to linger for
some time, economic growth will be lower than we would like.
This is why the federal government needs to do more to help
Americans earn college degrees.

For much of the 20th century, the U.S. benefited from
rapidly rising educational levels, as the economists Claudia
Goldin and Lawrence F. Katz of Harvard University showed in
their 2008 book, “The Race Between Education and Technology.”
Over the past 30 years, however, educational attainment has
risen much more slowly. From 1960 to 1985, the share of adult
Americans with at least a college degree more than doubled, to
19 percent from less than 8 percent. From 1985 to 2010, though,
the share rose by only about half, to 30 percent. This slowdown
has exacerbated inequality and crimped growth.

If the increase had continued at the same rate as before
1985, about half the adult population today would have at least
a college degree. More graduates would mean lower inequality,
because the wage premium for a college degree would be reduced
by the additional supply. And it would mean higher national
income, because better-educated workers are, on average, more
productive.

So it is important to ask what we can do to raise college
graduation rates. It may be useful, in turn, to break that
question down into the three stages of attaining a degree: high-school graduation, college enrollment and college completion.
For now, I would like to focus on the first two stages. (A
future column will examine the issue of college completion,
including innovations that could reduce the cost of attendance.)

High School

The first challenge, it seems, is already being met to some
degree. In a surprisingly encouraging, though little discussed,
development, the high-school graduation rate has been
increasing. After stagnating from 1970 to 2000, it has risen by
about six percentage points over the past decade, reaching about
85 percent. The increases have been particularly substantial
among blacks and Hispanics. In a new paper examining this trend,
Harvard University economist Richard Murnane says many recent
school reforms (such as providing support and guidance to
ninth-graders) look like promising explanations, though he says
the evidence is too thin to allow definitive conclusions, or to
suggest exactly what we can do to sustain or expand on the
recent success.

The second stage involves college enrollment. Among many
considerations that influence a person’s decision to attend
college, financial aid is a significant one. Aid to
undergraduates totals about $200 billion a year in the U.S., and
about two-thirds of students are eligible for some form of
assistance. A variety of evidence suggests that every $1,000 of
additional grant aid per student increases college enrollment by
about three to four percentage points, according to a review of
the literature by Susan Dynarski, a professor of public policy
at the University of Michigan, and David Deming, an assistant
professor of education at Harvard.

The reverse is also true; people who lack access to
financial aid are less likely to invest in college. Michael
Lovenheim and Emily Owens of Cornell University found this
effect in their study of a 2001 amendment to the Higher
Education Act that prevented people convicted of drug offenses
from receiving federal financial aid for two years. College
attendance among those affected by the rule plummeted.

It is not just the amount of aid that matters but also the
complexity of the process. Students apply for federal aid
through the Fafsa (free application for federal student aid),
which is cumbersome to the point of being intimidating to many
potential applicants, who are often unaware of the aid for which
they are potentially eligible. The 2011 Fafsa poses 116
questions, almost as many as a full 1040 tax return (and many
more than the simplified 1040EZ form).

Financial Aid

The cost of this complexity was demonstrated in the results
of an experiment by Eric Bettinger, an associate professor of
education at Stanford University, and several colleagues.
Working with H&R Block Inc. tax preparers, the researchers
randomly assigned potential applicants to two different groups.
One received assistance in filling out the Fafsa, as well as an
estimate of their aid eligibility and information about college
options; the other received information about aid eligibility
but no help in filling out the forms.

Those in the first group “were substantially more likely to
submit the aid application, enroll in college the following
fall, and receive more financial aid,” the researchers found.

Over the past few years, the Fafsa process has been
simplified a bit. There are slightly fewer questions, for
example, and some applicants can now transfer their tax
information to the Fafsa electronically, which saves time and
improves accuracy.

This may encourage the growing numbers of high-school
graduates to take the next step and enroll in college. But more
should be done to simplify the process of getting financial aid.
U.S. economic growth depends on it.

(Peter Orszag is vice chairman of corporate and investment
banking at Citigroup Inc. and a former director of the Office of
Management and Budget in the Obama administration. The opinions
expressed are his own.)